The fast-fashion giant Asos is looking increasingly defenceless against the many challenges it faces — and not just because it is still without a boss. The former stock market darling is battling against snarled-up supply chains, higher labour and freight costs and more competition for consumer pounds that are becoming shorter in supply.
Asos investors are grateful for any crumbs these days. An 87 per cent decline in adjusted pre-tax profits — a statutory loss — for the six months to the end of February was in line with low expectations, but was enough to push the shares almost 5 per cent higher.
That is scant relief for longer-term shareholders, who would have stomached a decline of almost 70 per cent in the value of their holding over the past 12 months. The group is nearing its cheapest level ever, equating to an enterprise value of 6.9 times forecast earnings before tax and other charges or a forward sales multiple of only 0.4.
Yet some investors expect the shares to fall further. Short interest in Asos has risen in the past 18 months to 3.74 per cent of outstanding share capital, according to data from the Financial Conduct Authority.
Forward multiples that low indicate dwindling faith in the online retailer’s sales and profit prospects. A warning that uncertain consumer demand would mean “a greater degree of risk” than normal for performance hardly inspires confidence. Analysts have forecast adjusted pre-tax profits of £98 million this year, which would represent a decline of almost half on the last year.
Meeting those expectations means management finding more ways to cut costs with gross margins expected to fall by 1 to 1.5 percentage points for the full year. The margin has been hit on the cost and sales front. Higher freight costs and wage inflation increased expenses; delays getting stock into warehouses meant more discounting and lower sales growth. The gross margin fell to 43.1 per cent over the first half, from 45 per cent for the same time in the prior year.
Asos has got a better grip on managing delays, reckons its finance chief Mat Dunn, who is holding the fort, but that has meant spending more on building stock, tipping the group into a net debt position of £62.6 million. Building inventory brings more risk, particularly if Asos is forced to discount more to shift stock, thinks the brokerage Liberum, prompting analysts to cut their adjusted pre-tax profit forecast for this year by a third to £91 million. A target price of £17, cut from £23, is only 88p above where the shares closed yesterday.
Why might Asos struggle to offload its garb? Higher living costs could cause consumers to cut back spending on non-essentials, hardly good for fast-fashion retailers that thrive on high-volume, low-priced sales. Revenue growth has been slowing, at only 4 per cent over the first half, as online retailers like Asos compete with high-street retailers and other outlets for shoppers’ post-lockdown cash.
Asos is undertaking a balancing act, managing higher costs with the need to maintain its allure to its core Gen Z and millennial customer base. The benefit of low to mid-single digit price increases put through at the start of this calendar year could easily be swallowed up by inflationary pressures.
The group’s greatest hope for sales growth lies in expanding in the US — aided by the acquisition of the Topshop brands, which had a stronger US presence, and the tie-up with Nordstrom, the US department store chain — and Europe.
Investors might want to hang on in the hope of a bidder being teased out by Asos’s cut-price market value, but without that materialising there seem few catalysts to lift the shares.
ADVICE Avoid
WHY Cost inflation and the prospect of further slowdown in sales growth could cause the shares to derate
Vietnam Enterprise Investments
Emerging market trusts are out of fashion, pushed aside due to concerns about the Chinese economy and the prospect of weaker growth for developing countries on the back of the war in Ukraine.
The impact on Vietnam Enterprise Investments has been mixed. On the one hand, the trust trades at a 20.8 per cent discount to net asset value, above a five-year average ballpark range of between 10 and 15 per cent. But on the other, the shares have benefited from the flow of capital out of China and into Asian markets and have risen 19 per cent over the past year, beating the heavy declines from China-focused trusts such as Baillie Gifford China Growth Trust and JP Morgan China Growth and Income.
The FTSE 250 trust takes heavy positions in companies and can go up to five times overweight or underweight compared with the Vietnam Index. At the end of February, the steelmaker Hoa Phat Group accounted for 11.7 per cent of assets, with Vietnam Prosperity Bank and the retailer Mobile World accounting for a further 21 per cent.
Inflation is a risk, particularly if it engenders a broader economic slowdown that damages the fortunes of the banking, property and retail sectors, which the trust is heavily exposed to. The consumer price index in Vietnam is up 1.2 per cent but inflation is expected to climb: the fund manager Dragon Capital has increased its forecast for this year from 3.5 per cent to 4.2 per cent.
But note that the rate of inflation is still far below that ravaging the UK and the US. Note also that Vietnam is a net importer of goods, which gives it a better line of defence against commodity inflation than in developing markets such as Turkey, a large importer of food and fuel.
Elevation from frontier into the MSCI emerging markets index has not materialised as some investors might have hoped. Inclusion in the high-profile index, a benchmark for both active and passive funds, would naturally attract more flows to Vietnamese companies. For what it’s worth, it has beaten the index provider’s emerging markets index over the past five, three and one-year periods. So, too, has it outperformed the benchmark Vietnam Index over those timeframes on both a share price and NAV return basis.
ADVICE Buy
WHY Shares are attractively priced for longer-term growth
